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  • Sugar Taxes: Health Aid or Budget Band Aid

Sugar Taxes: Health Aid or Budget Band Aid

22 February 2017

By: Jacqueline Viljoen, BDO Tax Services

The sugar tax becomes a reality on 1 April 2017. A sugar tax is not unfamiliar to South Africa and was previously imposed on Sugar Sweetened Beverages (SSBs), but abolished in April 2002, after a nine year stint. The abolition followed lobbying by industry and although it’s back, it is not for the same reasons. Previously, sugar tax was imposed purely to generate revenue. The reasoning behind the reintroduction of sugar tax, is to address health concerns related to excessive consumption of SSBs, in the hope that price elasticity of SSBs will ultimately reduce demand and consumption.

It is estimated that a 20% price increase will impact consumers significantly. Sugar tax is expected to be implemented at a rate of R0.0229 per gram of sugar. SARS and the South Africa authorities are of the view that the potential reduction in consumption of SSBs, as a result of higher prices, will contribute directly to the overall health of lower socio-economic groups. This, in turn, will relieve pressure on government resources, such as public clinics. The additional revenue generated through the imposition of the sugar tax can also be used to fund health care and medication.

Sugar tax is akin to a sin tax as both have the same purpose: to decrease consumption and increase revenue. Besides raising revenue, sin taxes are often imposed to reduce negative externalities such as abuse. Although a sin tax decreases affordability, it often gives rise to smuggling, and illicit trading and production.

The Southern African Development Community (SADC) found that illicit trade in alcohol and tobacco caused a significant decrease of excise and VAT revenue in the SADC region. The study also noted that a tax increase may not necessarily increase revenue or decrease consumption. Consumers may opt to shift to products with a lower price and quality (substitution effect).

To ensure an increase in revenue or sustained reduction in consumption, it is common cause that sin taxes should be accompanied by control and enforcement. It is arguable whether the sugar tax will impact consumption and, if so, how much. Whether the proposed fiscal intervention and corresponding subsidization of fruits, vegetables and other healthy products will ultimately have a real beneficial impact is unclear.

Although a sugar tax may potentially positively impact society, it could be viewed as discriminatory, especially against lower socio-economic groups. If the sugar tax is really impactful and reduces demand, its implementation will result in job losses in the sugar and sugar-products industries. Opponents of the sugar tax argue that it is regressive (heavier relative impact on the poor) and that negative health externalities are not caused by excessive sugar usage but factors such as malnutrition and unhealthy diets. Lower socio-economic groups may not be able to afford healthy food. The Minister of Finance, in his Budget Speech earlier today, announced that the sugar tax has been revised to now include intrinsic and added sugars. The proposed sugar tax will likely be implemented in 2017, once the legislation has been finalised.

In conclusion, the imposition of sugar tax introduces a mixed bag of arguments. Whether a sugar tax is the way to go is at this stage, at best, an uneasy argument.

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